We have seen a number of SPACs (Special Purpose Acquisition Companies) as Social capital Hédosophy V (NYSE:IPOE) have taken on great success in recent weeks. Many of these sales seem to be deserved. However, the one in stock IPOE does not.
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It is quite obvious that, in general, the PSPC trend has gone too far. We have seen a PSPC increase by over 400% even before the details of an agreement were announced and confirmed. Others have won even more before and after their mergers, often in deals that look a lot like a bubble.
There have been excesses in the group. There is still some left. Too much money is too few good ideas. PSPCs looked like “easy money” just a few months ago; a semblance of reality has set in.
This reality appears to have put pressure on the IPOE stock, which is down about a third in the past two months.
But just because PSPCs as a whole have question marks doesn’t mean all PSPCs have them. In fact, the fusion of SCH V and the target SoFi (Social Finance) looks awfully appealing. SoFi looks like a potential fintech leader. Thanks to the wider sale of SPAC, investors can now (eventually) own this leader at a much lower price.
SoFi’s growth so far
As 2020 approached, I was extremely bullish on the equity market. I predicted that a number of huge trends would underpin a decade to be known as “Crazy years.”
The coronavirus pandemic got off to a terrible start to the decade. But as normalcy returns, the decade is back on track.
One of the biggest changes we’ll see in the years to come is a massive upheaval in the financial industry. Gone are the days when the “big banks” dominated personal finance. Disruptors are on the way.
Some of these disruptors will be stepping up their cryptocurrency efforts. But some, like SoFi, will operate within the more traditional boundaries of the financial system.
SoFi’s growth is already impressive. The business started just ten years ago with a pilot student loan program. It has since spread to mortgages and personal loans. Backed by a proprietary subscription system that goes way beyond a credit score, SoFi’s membership has exploded.
At the end of 2019, according to the merger presentation, SoFi barely had 1 million members. It is expected to reach 3 million by the end of this year.
These members are expected to generate more than $ 600 million in revenue in 2021. And SoFi expects to be profitable on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
The arguments in favor of IPOE actions
What makes IPOE stock exciting is that SoFi’s story should only get better.
Take the company’s product offering. There’s no reason SoFi should stop growing in the mortgage business, and it won’t. SoFi plans to turn to credit cards and stock and crypto trading.
Indeed, SoFi itself seems on its way to becoming a bank. The company is the acquisition of a small bank based in California, which it can use as a platform to develop a digital financial institution serving consumers across the country.
That’s not all. SoFi plans to expand Galileo, a payments company it acquired last year. Galileo offers software that essentially enables any business to build sophisticated financial services that serve consumers and businesses.
Obviously, there are years of growth ahead. In fact, there may well be years of growth ahead. As SoFi itself pointed out in presenting the merger, the current “too big to fail” banks combined have a market cap of well over $ 1 trillion. SoFi targets these banks.
Assessment and risks
After the merger, what will be a publicly traded SoFi will have 865 million shares outstanding. The current IPOE share price therefore suggests a market cap of just under $ 15 billion. With $ 2.4 billion in cash, the company is valued at around $ 12.4 billion.
It is certainly a large number. That’s almost exactly 20x the revenue for 2020.
But when you consider SoFi’s growth potential, it’s a multiple in which the business can easily grow. In fact, the company itself sees earnings of around 50 cents per share in 2023 and over $ 1 by 2025. If SoFi met these targets, that share would likely have more than doubled in the 4-5. coming years.
After all, look around the fintech space. Even mature companies are trading for more than 40 times their profits. A SoFi that develops well and performs well would likely receive a premium. Apply, for example, a multiple of 50x to $ 1.10 in 2025 earnings and IPOE stocks show more than 200%.
So what’s wrong? Obviously, there are always risks. In particular, we cannot just assume that SoFi will achieve its goals. Competition will be tough and an untimely macroeconomic turnaround could have an impact on the company’s growth.
The PSPC sale may not be over. Wider valuation concerns in the market could also exert pressure.
But for this story, that sounds like risks worth taking. Even though SoFi is slightly below its targets, it will continue to grow at an impressive rate. The company has already gone from zero to over $ 600 million in revenue by taking over the businesses of the same competitors it will face in the future.
Even the chart looks good with IPOE stock showing clear support below the current level.
There is simply a lot to like here. The growth so far has been phenomenal. The opportunity ahead is huge. SoFi is a business worth owning. And it’s certainly worth buying at a price a third cheaper than two months ago.
As of the date of publication, neither Matt McCall nor the InvestorPlace research staff member primarily responsible for this article held (directly or indirectly) positions in the securities mentioned in the article.
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